Good day, ladies and gentlemen. Welcome to the TELUS 2013 Q2 Earnings and Guidance Conference Call. I'd like to introduce your speaker, Mr. Darrell Rae. Please go ahead.

Welcome, and thank you for joining us today for our second quarter 2013 investor conference call. The call is scheduled for up to 1 hour. The news release for our second quarter financial and operating results and detailed supplemental investor information are posted on our website, telus.com/investors. [Operator Instructions] Let me now direct your attention to Slide 2. This presentation and answers to questions and statements about future events such as 2013 guidance, intentions for dividend growth and future share purchases are subject to risks and uncertainties and assumptions. Accordingly, actual performance could differ materially from statements made today, so do not place undue reliance on them. We also disclaim any obligation to update forward-looking statements, except as required by law. I ask that you read our legal disclaimers and refer you to the risks and assumptions outlined in our public disclosures and filings with securities commissions in Canada and the United States. Slide 3 outlines today's agenda. We will start with opening comments by President and CEO Darren Entwistle; followed by a review of operational highlights by Joe Natale, our Chief Commercial Officer. John Gossling, our CFO, will provide a review of second quarter financial results before concluding with a question-and-answer session. Let me now turn the call over to Darren, starting on Slide 4.

Thanks, Darrell. Before we review our second quarter results, I want to take the opportunity to speak to the current regulatory landscape that we are facing. While TELUS always welcomes healthy competition, the federal government's current policy framework for the wireless marketplace contains 3 loopholes that offer materially unfair advantages to large foreign corporations. Accordingly, we've approached the federal government with 3 reasonable ASCs [ph] to close these shortcomings and, thereby, level the playing field for Canadian wireless companies. Firstly, we are asking the government to ensure that any foreign entrant be required to build its own network in both rural and urban communities and not piggyback on the networks TELUS has invested billions of dollars to build across our vast and sparsely populated geography. Indeed, since 2000, we've invested over $100 billion in technology and operations across Canada. Notably, our country, Canada, is #1 globally when it comes to private investment in telecom infrastructure per capita, effectively double the OECD average. As a result, Canadian networks have been ranked as world-leading in terms of reliability, speed and the extensiveness of the network coverage. Sadly, Canada does not have the fastest wireless speeds amongst the 34 OECD countries. Indeed, we were only ranked #2. In the spirit of being Canadian, I'd like to take this opportunity and apologize to all of my fellow citizens for beating every country in the OECD report, except Denmark, in terms of wireless speeds. Sorry about that, and you've got my word that we're working to become #1 from the #2 position we currently hold. Notwithstanding this, according to the OECD report, Canada's networks are 2.5x the average speeds of those wireless data activities in Germany and Italy, 3x the wireless data speeds offered in the U.S. and France and 9x the wireless data speeds…

Thank you, Darren. Starting on Slide 5, we produced healthy and leading second quarter postpaid wireless net additions of 100,000, with the mix continuing to shift toward smartphones and higher-end postpaid plans. Although postpaid net additions were down slightly year-over-year, we maintained our strategic focus on quality, high-value smartphone-centric loading. Overall, our total postpaid subscriber base was up 5% from last year. Moving to Slide 6. TELUS reported an 11th consecutive quarter of year-over-year blended ARPU growth, up 1.4%. This was driven by strong ongoing wireless data growth of 17% as we continue to generate robust smartphone adoption. Our smartphone subscriber base increased to 71% of our postpaid base, a 12-point increase compared to 59% last year. This is being supported by the continued rapid expansion of our 4G LTE network, now covering nearly 80% of the Canadian population. I would note that Canada is third in the world in terms of smartphone penetration, behind only Japan and South Korea, and 3x the world average when it comes to smartphone adoption. Thankfully, we have made the investment to enable this as there is no point to having the best smartphones if we don't have the network to accommodate it. As shown on Slide 7, TELUS reported low and stable blended churn of 1.4% this quarter. Postpaid churn was an industry best at 1.03%. This was in the face of a highly competitive intensity in the quarter. Low churn allows us to take a more measured approach in acquiring new customers, in line with our consistent focus on higher-quality subscribers. Our industry-leading churn reflects a few things: the significant investments we have made in evolving a world-leading network technology and coverage; our disciplined acquisition and retention investments, particularly directed toward smartphones; and our team's relentless focus on the customer experience. Turning…

Thanks, Joe. I'm on Slide 11. Second quarter wireless results continue to be strong across the board despite increased competitive intensity. General wireless revenue increased by 6%, reflecting continued subscriber and data revenue growth, while EBITDA for the quarter increased by 5%. EBITDA was impacted by higher restructuring and other like costs in our wireless business of $10 million, when excluding EBITDA, increased by 6%, reflecting a margin of 48.1% of network revenue, up 50 basis points year-over-year. This is the sixth consecutive quarter of year-over-year margin expansion. Capital expenditures decreased by $23 million, or 12%, due to lower 4G LTE expenditures. Simple cash flow increased by $55 million, or 13%, to $495 million due to higher EBITDA and lower capital spending. Slide 12 shows the combined impact of our data ARPU growth, plus the increase in our subscriber base, which resulted in wireless data revenue increasing by $89 million or 17% in the quarter. As Joe mentioned, this growth was driven by higher penetration of smartphones and associated take-up of data plans, as well as higher data roaming volumes. Data now represents 43% of network revenue compared to 39% in the same period a year ago. Slide 13 shows our improving wireline financial results. Revenue increased by a notable $79 million, or more than 6%, due to strong data revenue growth from TV and high-speed Internet subscriber growth, combined with higher ARPU. Wireline EBITDA declined by 1% but was impacted by significantly higher restructuring and other like costs of $29 million, which increased by $20 million year-over-year. Normalized EBITDA, excluding the net gain last year on TELUS Garden and restructuring and other like costs in both periods, was up 7.3%. The improvement reflects improving Optik TV and Internet margins, helped by lower subscriber acquisition costs and continued ARPU growth.…

Thanks, John. Matthew, can you please proceed with questions from the queue for Darren, Joe and John?

[Operator Instructions] The first question is from Greg MacDonald of Macquarie.

So first of all, to John Wheeler, yes, good luck, John. It's been nice working with you. I also wanted to ask a question on something that continues to impress me, and that's the access line numbers. Access line erosion is a better number for you guys than it seems for other telephone companies, including those that actually have some reasonable IPTV tractions. So, I guess, what I want to ask is, overall, what's the potential for this trend to be continuing? And I wonder if you just might answer that question in the context of the 2 biggest drivers of the impact here, wireless substitution and cable competition on the negative side. And then IPTV, to what extent is that actually helping you with this impressive rate of erosion, if you can call it that?

Greg, I'll take the question. So a few thoughts overall. Yes, we've seen an improving trend around access line erosion, both on the residential side and the business side. A few comments first. On the residential side, there's no question that the majority of the impact in terms of erosion overall is coming from wireless substitution. If you kind of look beneath the number, well over 50% or 60% of the erosion is coming from customers who have decided to cut the cord and moved to a wireless-only solution. For us, that's actually a net positive when you consider our footprint on wireless across the country versus our footprint on wireline in Western Canada covering 23% of the population and, of course, Eastern Quebec as well. But we are a net gainer when it comes to wireless substitution overall. If you look at what's helping us stem the remaining portion of it, it really comes down to our ability to bundle services. So IPTV on the consumer front has really been the driving force on that end. Of our IPTV customers, 97% of the customers have at least one other residential product with us, and well over 3/4 add home phone or high-speed or both at the same time when they add TV. So we're seeing that effect clearly because of the offering and the superior capability of Optik TV and what it means for customers coming back to us. In fact, a strong majority of the customers we're gaining through Optik TV left us a long time ago. We have no services with them whatsoever. They're coming back as a result of the compelling value proposition around TV. On the business front, the analogy is also true. On the business front, we've got -- a Business Freedom bundle that is doing well for us in the marketplace. Business Freedom is essentially a wireless and wireline solution that is Clear and Simple in terms of the value proposition and offers business customers the opportunity to combine all of their services and needs, whether it's wireless, wireline, hosting capabilities, website hosting, other data services, and pay for it on a transaction or per-seat [ph] basis. So that innovation, both in terms of the offering itself and the clarity and simplicity around this, actually helped us stem losses to our cable competitor on the business side and do very well in terms of driving ARPU growth for the bundled offering and driving churn improvement as a result as well. So that's sort of the landscape when it comes to NAL, some things that we're doing to help moderate and continue the trend.

Well, Joe and his team have done an excellent job in terms of putting Customers First and having a view on Clear and Simple value-pricing services and support that extends from wireless into wireline. And I think that focus on putting Customers First has improved our retention characteristics not just on the wireless side of the business but also on the wireline side of the business. And it's serving us very well across both. I think going forward into the future, it will be interesting to see the synergistic nature of Joe's SharePlus plans that have been recently launched on mobility, being inculcated into the bundle with IPTV and HSIA. And we think about data pooling within the household. I think that will improve the stickiness of our relationships, and I think that would have extensibility to now mitigation in a way that would be quite positive. So I'm looking for that synergy to augment the retention characteristics of the bundle still further. And I like the extensibility of data sharing and what it can do to solidify our NAL relationship with the household or network access line relationship with the household.

It makes a lot of sense. Joe, can you just tell us what percentage of IPTV customers actually keep the phone -- the landline in a ballpark?

Yes, I wouldn't -- I'm not really comfortable disclosing that, given the competitive sensitivity around that. I think my comment that over 3/4 are adding home phone and high-speed, I think, speaks to the headline statement overall, Greg.

Our next question is from Jeff Fan of Scotiabank.

My question is for Darren on the regulatory side. The first part is -- I totally understand your comment regarding the piggybacking of the network with the mandated roaming rules, but I guess there's still -- those roaming rates are still negotiated. So, I guess, what I'm asking is, is there a concern or fear that the regulator may move to some sort of a mandated roaming rate situation? And the second part to that question, along the regulatory side also, is, as you mentioned, Verizon's position in the U.S. is very similar to most incumbents, not having any preferential auction rules. Obviously, what potentially could be inconsistent for them is that they are actually taking advantage of some of those preferential rules here in Canada, if they do decide to enter. So a business's got to do what the business has to do, but I'm just wondering from your angle and from the industry, whether there's an opportunity to address that inconsistency with some of the appropriate regulatory bodies, especially in the U.S. on Verizon is doing versus what they are saying.

Okay. That's interesting that you addressed the regulatory question to me because we've actually moved that portfolio over to John Gossling.

Thank you very much.

So as it relates to roaming, a few things. Firstly, when we have tabled our 3 ASCs [ph], which are highly correlated, I think it's a bit inappropriate that you would consider giving a deeply resourced foreign entrant near exclusive access to an acquisition within the Canadian landscape or a series of acquisitions within the Canadian landscape, where they would be able to secure both network infrastructure and spectrum at a significant discount because of the absence of a competitive process. And then on top of that, to have mandatory access that goes just beyond network carriers. That could extend to towers or responsibilities in the roaming front. I would say those things are deeply, mutually exclusive, in my view. Secondly, I understood the policy on the regulatory front in Canada to be infrastructure-based competition. And that's been a long-standing regulatory policy within this country. And basically, the thesis is, if you want to compete and you want to have a sustainable competitive position in the marketplace and you want to differentiate yourself on features other than just price discounting, then you have to build and you have to make an investment in that regard. And when I look at an organization like Verizon, that's a well-respected organization but deeply resourced, I asked myself, can that organization afford to build? And I would say, if TELUS, Bell and Rogers can afford to build, if TELUS, Bell and Rogers can invest over $400 billion in cumulative CapEx and operating investments over the last decade in our country and if we have the discipline and the sustainability to wait 27 years to go cumulative cash flow breakeven as an industry, then I think a deeply resourced organization like Verizon should seek to answer the same challenges and build out their own infrastructure…

Our next question is from Dvai Ghose of Canaccord Genuity.

A question for Joe or John and maybe one for Darren. The first question is on your wireline margins. So if I strip out your restructuring in the TELUS Garden gain a year ago, your margin this quarter on wireline is about 27.4%. It's up slightly from a year ago, at about 27.1%, 27.2% and down from 29.2% in the first quarter. And that's despite the fact that you've got increased ARPU, reduced churn, increased lifetime revenue per subscriber, increased cost-cutting, et cetera. Why are we not seeing more of an impact in terms of margin?

Dvai, it's John. Your observations are good in terms of pieces that are driving it. There is always a seasonality in wireline. It's not consistent. The other thing that -- as you were adjusting the Q2 numbers, there was an impact of the flood in Southern Alberta, and that was about $5 million in Q2 this year. So that is causing a drag as well. There will be more of that in Q3, as the cleanup continues into July. So there's a lot of moving pieces, but certainly, that's probably the biggest driver in addition to what you've noted.

But do you think a 30% margin is conceivable in the medium to longer term?

Well, it's certainly where we'd like to get back to. There's no questions. But the mix is the biggest factor in determining that in terms of the product mix.

We've been on the record as saying 30% is where we'd like to get back to in previous statements with investors. So I'll underscore that comment by John. I would note that we are up on a year-over-year basis. I would note that I think, as you've remarked on, we have a goal to start -- eliminate the margin erosion, have margin stability and then move to margin accretion, with a goal to getting to the 30% margin level. And then the other thing is, there are not very many wireline companies around the world. You are the one that referenced normalizing for the TELUS Garden gain. When you normalize for that, our EBITDA growth on wireline was 7.3%. I don't think there are very many wireline companies around the world generating growth of 7.3% at the operating profit level. So I'd say that's a good start. I want to get to 30% on the margin front. I want to stop the margin attrition, flatten it out and start the margin accretion. And that's absolutely what this organization is focused on. The other thing I would say, back to my comments, this is not an organization that's a one trick pony on the wireless front. We have a great asset composition, and we've got 2 contributing factors to our bottom line growth, one being the traditional one on the wireless side. But we have an emerging one on wireline side, and I'm encouraged by that.

Now I think that's very fair. My other question for you, Darren, is, look, with Verizon, obviously, there's a campaign going on, and I wish you the best of luck. But so far, it seems to have fallen on deaf ears with government. We'll see if that changes. So I know this is a very speculative question, but if you assume the status quo in terms of the regulatory situation and the Verizon entry, are you still comfortable in assuming a 10% per year dividend growth model and a $2.5 billion NCIB? And if so, why?

So the answer is yes. I am comfortable with our dividend growth model, targeting 10% growth per year through 2014, '15 and '16. And I'm comfortable in the sustainability of our $2.5 billion NCIB program. The answer on the why front is biased because I like the fact that we have a great asset composite, and we've got 2 growth tenants, not just 1, as per my previous comments. In fact, I would hope as we get into 2014, we can give you greater disclosure on the third growth tenant, being our health-care business. In terms of why, I think we're exceedingly strong when it comes to brand and distribution. And I think you heard Joe's comments about how successful we are being on our Customers First strategy and what the perception is of both our TELUS and our Koodo brands in the marketplace. I like our competitive positioning because of what we can do on wireless and wireline bundling, and we just talked about that. And the economic benefits of that are extremely laudable, even at the high-teen level in terms of mitigating and now erosion, as we referenced in Greg's question. I like the fact that when you've got the ubiquity of coverage that we have with our macro wireless network, we are ideally positioned to develop a small sales underlay on a meshed basis to, again, further differentiate ourselves in the marketplace. And I think that would be exceedingly challenging for any foreign entrants coming into the market at this juncture. I like the fact that we are an organization with an extremely strong balance sheet. And think of what it does for us. It supports what we want to do from affordability as it relates to dividend growth models and NCIBs. It supports our ability to…

Our next question is from Drew McReynolds of RBC.

I'm certainly shifting gears a little bit here. Just with respect, I guess, for you, Joe, on the wireless side, you did take some of your M2M subscribers out of the calculation bar. So I was just wondering if that had any material impact in the quarter. And then on the traffic, the data traffic side on the wireless, you just alluded to some of the traffic being impacted by Wi-Fi hotspots. I'm just trying to understand whether that's kind of discretionary offloading from you or whether it's a substitution effect. So just understanding the relationship there.

Sure. So on the M2M front, it only has a very small impact in the quarter. It's a growing business for us, and we want to treat it appropriately in terms of how we count the subscribers going forward and its impact on the overall clarity of our reporting metrics. So no real substantial impact in the quarter on that front, Drew.

Drew, can you repeat your second question?

Yes, sure. Just I noticed in the MD&A, just you guys alluding to some of the data growth in the quarter just being negatively impacted by offloading some of that traffic on the Wi-Fi. So I'm just wondering if that's a substitution effect that's under way or is it something that you guys are doing to just manage the network load.

Yes. I think we've highlighted that as a risk factor, Drew. We won't give more specificity on that, other than to say, when we move traffic over to Wi-Fi, what we give up on the margin front, we more than save on the CapEx front by deferring network exhaust at the macro level. That's why we're pursuing a strategy of a macro -- microcell combination because, economically, looking not just to the P&L but the balance sheet of the organization as well, we're willing to give up an element of revenue to save dollars of CapEx by managing better exhaust at both the technology and at the spectrum level. And if we can defer that by moving traffic from macro to micro, it's an economically sanguine thing to do. So it's NPV positive, is what I'm saying, from a bottom line perspective.

Our next question is from Glen Campbell of Bank of America.

I had one each on wireline and wireless. Starting with wireline, you had very good revenue growth in data and, John, you talked about some of the drivers there. Could you confirm whether there are, say, onetime factors helping that revenue in this quarter? I'm thinking of lumping this around equipment sales or whether we should look at the revenues in there as being a pretty clean run rate.

Glen, it's John. It's quite clean. There isn't a lot of lumpiness that happened in the quarter. It's really, an ARPU story.

The quality of the earnings, Glen, is very solid.

That was a terrific number. On the wireless side, I mean, you don't disclose postpaid ARPU separately. I respect that, but it looks like we're looking at roughly flat postpaid ARPU. As you look forward...

It's a little bit better than flat, Glen.

Still a little bit better?

Yes.

Okay, that's great. Given what we're seeing with pricing, which is sort of super aggressive pricing through the first half and maybe more disciplined environment going forward, can you give us your thoughts on where -- on how postpaid ARPU is likely to trend over the next year or 2?

Sure. Why don't I start? And, John, you can certainly pipe in. So if you look at ARPU in the first half of this year, it's roughly up over -- year-to-date by 1.7%, roughly up 2.1% over the same period. Last year, our revenue guidance, Glen, is, as you know, 6% to 8% growth. So it kind of implies a small positive increase in ARPU overall. And as we've said before, it's often very hard to protect ARPU for all the reasons that we all understand. On the upside, the smartphone growth opportunity continues to drive ARPU in the right direction for us, not just smartphone adoption in terms of penetration going north of 71%, but also the customers that make the move from less capable smartphones to more capable smartphones, make the move from HSPA smartphones to LTE smartphones. We're seeing data growth and ARPU growth as a result of that. If you add to that the fact that our new share plans really have a more-for-more component or design element within them, and that, we believe, will give us some lift or growth on the ARPU front. And we talked about roaming in the past. We're still a relatively new player when it comes to international roaming. Given the growth and opportunity in that area, I think that will have a positive impact. The downward pressure is going to come from the fact that we're seeing a lot of tablet loading and data-only device loading. Now the margin in that loading is very good, very attractive to us as an organization, but ARPU will have downward pressure as a result of it. And I think it's important to look at the overall AMPU and the margin at 48.1% in the quarter, which was up 50 basis points from…

Our next question is from Tim Casey of BMO.

Just switching over to wireline. Could you characterize what you're seeing on the wireline side with respect to pricing, promotional activity and whatnot against your primary competitor there?

Sure. We're seeing a competitive intensity that has not really subsided substantially or changed in the last few quarters, but nowhere near the all-out price war that we saw at the beginning of 2012 and the end of 2011. Are we fighting head-to-head in the marketplace? Absolutely. There's a lot of aggression not just with respect to promotions, but also with respect to save offers and win-back offers for both organizations. And there's been a bit more sanguine discipline with respect to some price increases by our cable competitor that we've seen as of late. And we are carefully balancing our goals and ambitions around EBITDA and EBITDA margin, with the desire to grow the TV business. And we will do so in an economically balanced way. We're happy with the loading that we are achieving as an organization, but we're not going to do it at the cost of throwing EBITDA margin and growth to the side. But I would say it's a relatively more stable pricing environment than we saw at the beginning of 2012, is sort of the punch line for you.

So our last question is from Simon Flannery of Morgan Stanley.

I wonder if you could talk about the balance sheet a little bit. You've got still a very good credit ratio. It's about 1.7x debt to EBITDA. You've obviously got an opportunity with what stock price is right now. You've been active in the first half of the year. You've got some opportunity to continue to be aggressive in the second half of the year. How do you balance the potential from what's required for the spectrum auction, the buybacks, the leverage ratio? We've seen AT&T take their leverage up in part due to the opportunities given by the credit markets. Is that something where you might be more comfortable taking advantage of the buybacks, moving your ratio up a little bit from here?

Thanks, Simon. It's John. I'll take that one. Certainly, you've seen what we've done in terms of expanding the program for this year, and Darren commented on what we'd like to do in the future. So I think you've hit -- you've answered most of your question, actually. The leverage is very strong, 1.7x, low in our target range. So certainly, there's opportunity there. We are generating $4 billion-plus of EBITDA. So there's good support there. And we do have very strong liquidity, over $2 billion. So given the weakness that we've seen in the stock price, given the fact that the corporate development activities are perhaps restricted right now, in particular, one that we weren't able to complete, it made a lot of sense to push that NCIB share buyback higher this year. And I think your comments around the credit market, even though yields are up pretty significantly, actually, in the last couple of months, we've certainly got an eye on that. So I think those things all point to very strong position in terms of what we can do in our buyback. You've seen what we've done so far, pushing through the $500 million very quickly, and we'll continue to do different things in the market, whether they're private market transactions, whether they're -- we're in blackout still right now. We're doing automated buybacks, so we're being quite aggressive.

Simon, I think it's worth you having to look at the modeling in respect of, let's say, the NCIB program and its synergistic relationship with our dividend growth model. The extent to which we are buying back stock and canceling it when the stock has a characteristic of a 10% dividend growth rate is a very judicious and economic thing to do and helps with, I would say, the longer-term credit profile of this organization from the uses of cash perspective. Secondly, in terms of the quality of our balance sheet, it's underpinned by the quality of our assets and the earnings that they generate. And the quality of our earnings on wireless and on wireline, to the point I made earlier, is excellent. And I think that underpins not just the current state of the balance sheet but its robustness of well into the future, is simulating events like a vigorous spectrum auction. And then lastly, one of the things I'm looking at TELUS from a leverage ratio perspective, I'll remind people that in terms of tax affecting your leverage ratio, we are in a cash tax-paying situation. So to the extent to which we see any elevation in our leverage ratio, it has positive consequences as it relates to our cash tax position. So those are 3 elements that I would add to the comments that John made.

Thanks, Simon. And on behalf of Darren, Joe and John, I'd like to thank everybody for taking the time. Sorry, we ran a little bit over, but as we realize, I think we had some important issues to discuss. Enjoy your summer.

Ladies and gentlemen, this concludes the TELUS 2013 Q2 Earnings and Guidance Conference Call. Thank you for your participation, and have a great day.